2019 (7) TMI 1082 - AT - Income Tax

Computation of long term capital gain - sale of controlling stake - deduction being payment made to DSP Merill Lynch Limited (DSPML) towards non-compete and non-solicitation payment - assess contend that part payment relaes to business income - HELD THAT - This invoice dated 23-08-2002 clearly mentions that the said sum of Rs. 1.74 crore and odd is towards Advisory fee for controlling stake in REL along with the amount of service tax and offered for taxation. The assessee bifurcated Rs. 1.74 crore into two components. Whereas a sum of Rs. 74.92 lakh was considered as deduction in the computation of long term capital gain arising from the sale of shares it considered a sum of Rs. 1.00 crore towards noncompete fee paid to DSPML thereby reducing the business income to this extent. The invoice clearly demonstrates that a sum of Rs. 1.74 crore was entirely paid towards Advisory fees for sale of controlling stake in REL. The assessee tried to fortify its contention with the help of a letter dated 22-09-2011 received from DSPML. We are unable to give any weight to this letter since it is contrary to the own version given by DSPML in the year 2002 as the payment towards Rs. Advisory fee for sale of controlling stake . A letter coming into existence after about 9 years from the date of invoice cannot be taken into consideration at this stage. The ld. AR was called upon to place on record a copy of the agreement under which said sum of Rs. 1.00 crore was paid. He fairly expressed his inability to produce such an agreement which on specific requisition by the lower authorities also could not be adduced. CIT(A) was fully justified in treating the entire amount of Rs. 1.74 crore as deductible in the computation of long term capital gain and not accepting the assessee s claim of treating Rs. 1.00 crore as deductible from non-compete fee chargeable as business income. Deduction u/s.35DDA towards VRS on accrual basis - HELD THAT - Tribunal in assessee s own case for the immediately preceding assessment which has been discussed of the order. The Tribunal has held the assessee to be entitled to deduction u/s.35DDA on the basis of incurring of liability. A further direction has been given to ensure that the assessee is not allowed deduction on actual payment basis. The AO is directed to examine this aspect and allow deduction only towards incurring of liability i.e. on accrual of liability towards VRS u/s.35DDA and no amount should be allowed as deduction on payment basis. This ground is therefore allowed for statistical purposes. Deduction towards provision for warranty - allowable revenue expenses u/s 37 - HELD THAT - Actual expenses incurred by the assessee stand at Rs. 2.85 crore. There is a recovery of claim to the tune of Rs. 24.37 lakh. If claims recovered are reduced from the actual expenses incurred we get net amount of Rs. 2.61 crore and odd towards expenses incurred for the year as against that the amount of provision created by the assessee at Rs. 1, 59, 17, 000/-. As the amount of provision is less than the amount of actual expenses following the view taken by the Tribunal in its order for the A.Y. 2002-03 in the CP division we direct to allow the deduction for the entire amount of provision for Rs. 1, 59, 17, 000/-. However it is made clear that no deduction for incurring of actual expenses should be separately allowed. The contrary view of the Revenue in its appeal is accordingly dismissed. Disallowance of certain expenses - Addition of warranty provision - HELD THAT - We find that the first sum of Rs. 33, 76, 762/- is in the nature of actual expenses incurred during warranty period. Since a deduction has been separately allowed to the assessee on creation of provision for warranty there can be no question of allowing any separate deduction for actual expenses incurred in accepting the claims under warranty. We therefore uphold the impugned order to the extent of disallowance. Expenditure on Gifts - Assessee could not produce any evidence to show whether the Gifts were given for the business purpose or were hit by Explanation 1 to section 37(1) of the Act. In the absence of furnishing any such details we uphold the view taken by the ld.CIT(A) in sustaining this disallowance. Donations addition - Similar is the position regarding donations for which the assessee could not adduce any evidence. The impugned order is therefore upheld to this extent. Fee for handling share - the same is in respect of shares issued by the assessee company and not for handling any investments of the assessee. Such expenses incurred by the assessee are deductible in full. As regards the remaining expenses the ld. CIT(A) restricted the addition to 25%. Considering the peculiar circumstances prevailing in the extant case we are of the considered opinion that it would be just and fair if the disallowance is restricted to 15% of such expenses Computation of deduction u/s.80HHC - confirmation of inclusion of commission income as part of total turnover in the computation of deduction and towards confirmation of exclusion of 90% of Service charges and Miscellaneous income from profits of business for deduction u/s.80HHC - HELD THAT - Similar issue came up for consideration before the Tribunal in assessee s own case for the immediately preceding assessment year. Following the view taken by the Tribunal in assessee s own case for still another year the matter has been remitted to the AO for a fresh decision. Both the sides are in agreement that the facts and circumstances of the extant ground are similar to those for the A.Y. 2002-03. Following the view taken for the immediately preceding assessment year we set aside the impugned order and remit the matter to the file of AO for deciding this issue in conformity with the directions given by the Tribunal in its earlier orders. Set-off of long term capital loss on sale of mutual funds - AO set off against the long term capital gain on sale of shares of REL instead of long term capital gain on sale of property as claimed by the assessee - whether loss from listed securities being on mutual fund investments should be reduced from gains from other listed securities being shares of Revathi? - HELD THAT - Once the assessee has determined its long term capital gain income in a particular manner which has sanction of section 70 the AO cannot disturb such calculation merely because it is less remunerative from the angle of determination of tax. We find that the assessee set off its long term capital loss from the sale of mutual funds against the long term capital gain from transfer of Mulund property. This is absolutely permissible u/s 70(3) of the Act. We therefore hold that no exception can be taken to the action of the assessee and accordingly the amount of long term capital gain on Revathi CP shares at Rs. 7.09 crore should be taxed under proviso to section 112 of the Act. Ex consequenti this ground of appeal is allowed. Disallowance of expenditure u/s.35DD - Disallowance of Dealer Commission - stamp duty for transfer of immovable assets - HELD THAT - Similar issues came up for consideration before the Tribunal in the case of the assessee for the A.Y. 2002-03 2019 (7) TMI 949 - ITAT PUNE . Following the view taken for the immediately preceding year we dismiss this ground of appeal by the Revenue TP adjustment on Royalty payment - HELD THAT - It is found as an admitted position that the assessee paid Royalty to its AEs as per the rates approved by the RBI. The TPO determined NIL ALP simply on the ground that the AEs to whom the assessee paid Royalty had discontinued production of such products. In our considered opinion this is no ground to determine NIL ALP of an international transaction. The TPO is required to determine the ALP of an international transaction under one of the methods mandated under rule 10B of the Income-tax Rules 1962. Nothing of the sort has been done in the instant case. The TPO got influenced with extraneous reasons which have no bearing on the determination of the ALP of an international transaction. It is further observed that similar issue came up for consideration before the Tribunal in assessee s own case for the immediately preceding assessment year 2019 (7) TMI 949 - ITAT PUNE . The transfer pricing addition made in similar circumstances has been deleted. Considering the entire conspectus of the case including the fact that the payment of Royalty to AEs was as per RBI norms we are satisfied that the view taken by the ld. CIT(A) is unassailable. Interest u/s.234D - HELD THAT - AR fairly conceded that in view of the retrospective amendment carried out to section 234D by insertion of Explanation 2 by the Finance Act 2012 with retrospective effect from 01-04- 2003 the ground by the Revenue needs to be allowed. We therefore overturn the impugned order on this issue and uphold the charging of interest u/s.234D.

Summary

Issues Involved:
1. Disallowance of provision for expenses.
2. Income on sale of scrap.
3. Deduction for non-compete and non-solicitation payment.
4. Deduction under section 35DDA for Voluntary Retirement Scheme (VRS).
5. Deduction under section 35DD for fees paid to Registrar of Companies.
6. Deduction for provision for warranty.
7. Disallowance of miscellaneous expenses.
8. Inclusion of commission income in total turnover for deduction under section 80HHC.
9. Set-off of long-term capital loss against long-term capital gain.
10. Amalgamation expenditure under section 35DD.
11. Dealer commission.
12. Transfer Pricing adjustment on royalty payment.
13. Interest under section 234D.

Detailed Analysis:

1. Disallowance of Provision for Expenses:
The assessee made a provision of Rs. 8,25,000/- for expenses in the preceding year, which was disallowed as no expenditure was incurred. The Tribunal directed the AO to verify if this provision was reversed in the current year and included in the total income. If so, it should not be taxed again.

2. Income on Sale of Scrap:
The Tribunal directed the AO to verify the inclusion of Rs. 20,10,925/- in the current year's income, which was not offered for taxation in the preceding year. If included, it should be excluded from the current year's taxable income.

3. Deduction for Non-Compete and Non-Solicitation Payment:
The assessee claimed a deduction of Rs. 1.00 crore paid to DSP Merill Lynch towards non-compete and non-solicitation. The Tribunal upheld the CIT(A)'s decision that the entire amount of Rs. 1.74 crore was for advisory fees, not deductible from non-compete fee, as no supporting agreement was produced.

4. Deduction under Section 35DDA for VRS:
The Tribunal allowed the deduction on an accrual basis for VRS liability under section 35DDA, directing the AO to ensure no deduction on payment basis.

5. Deduction under Section 35DD for Fees Paid to Registrar of Companies:
Following the precedent from the preceding year, the Tribunal allowed the deduction of Rs. 2,10,000/- for fees paid to the Registrar of Companies for increasing authorized capital on amalgamation.

6. Deduction for Provision for Warranty:
The Tribunal allowed the provision for warranty at 0.4% of net sales for the Atlas Copco Division and the entire amount for the Chicago Pneumatic Division, as actual expenses exceeded the provision.

7. Disallowance of Miscellaneous Expenses:
The Tribunal upheld the disallowance of Rs. 33,76,762/- for actual warranty expenses, Rs. 14,99,816/- for gifts, and Rs. 6,26,628/- for donations due to lack of substantiation. It allowed Rs. 13,53,956/- for handling share records and restricted the remaining disallowance to 15%.

8. Inclusion of Commission Income in Total Turnover for Deduction under Section 80HHC:
The Tribunal remitted the issue to the AO for fresh decision, following the precedent from the preceding year.

9. Set-off of Long-Term Capital Loss against Long-Term Capital Gain:
The Tribunal allowed the assessee to set off long-term capital loss on mutual funds against long-term capital gain from Mulund property, as per section 70(3), rejecting the AO’s prioritization.

10. Amalgamation Expenditure under Section 35DD:
Following the precedent from the preceding year, the Tribunal upheld the CIT(A)'s decision to allow the amalgamation expenditure of Rs. 49,60,536/- on stamp duty.

11. Dealer Commission:
The Tribunal upheld the CIT(A)'s decision to allow the claim of dealer commission, following the precedent from the preceding year.

12. Transfer Pricing Adjustment on Royalty Payment:
The Tribunal upheld the deletion of the transfer pricing adjustment on royalty payment, as the TPO determined NIL ALP without proper method and the payment was as per RBI norms.

13. Interest under Section 234D:
The Tribunal allowed the Revenue's ground for charging interest under section 234D, following the retrospective amendment by the Finance Act, 2012.

Conclusion:
Both appeals were partly allowed, with specific directions for verification and reconsideration by the AO on various issues. The Tribunal's decisions were largely based on precedents from the preceding year and the adherence to statutory provisions.